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System Makes It Hard To Prioritize U.S. Bill Payments

It's not yet clear if the U.S. Treasury has the ability to pick and choose who gets paid and who gets stiffed if the $14.3 trillion debt ceiling isn't raised and the Treasury runs out of cash.

The government doesn't have flexibility like the average household might, says Jay Powell, a former Treasury undersecretary under President George H.W. Bush and a fellow at the Bipartisan Policy Center.

"What the United States government spends its money on is the safety net, which is largely health care and Social Security, plus an army," he says. "That's not like a household; a household may be able to stop going out to meals or to movies — things like that. You can't really do that at the federal level."

Furthermore, Powell says it isn't clear the Treasury Department can fine-tune its systems to prioritize the 80 million payments it makes every month.

"And you gotta consider that this is legacy government software, this isn't the latest product from Apple," he says.

The Treasury says it will soon provide some guidance about how it plans to function if the debt ceiling does not get raised. In an appearance on Fox News Sunday, Treasury Secretary Timothy Geithner promised that his agency would do what it could to "mitigate damage," but that in not raising the debt ceiling, Congress would be "irresponsible" for toying with potential delays of payments to Social Security and Medicare recipients.

Payments like those are processed in a two-step process. Each federal agency has its own separate account within the Treasury Department, and when it needs to pay its bills, the agency first verifies it has enough funds in its account. It then sends a request for money through a division of Treasury called the Financial Management Service.

Then, at each agency's direction, the FMS transfers the money to individuals or vendors. More than 80 percent of payments are electronic, but FMS also cuts millions of checks through its three processing centers around the country.

In 2010, FMS processed a billion payments worth $2.3 trillion.

A Limited Ability

Kent Smetters, a professor at the Wharton School and former deputy assistant Treasury secretary under President George W. Bush, says to his knowledge, Treasury has never had to tinker with this system to prioritize payments. And it has a limited ability to do so.

"Treasury can always rank the categories that they can pay," he says. "And so they can always say, 'Bondholders come first.' "

Which it will in order to avoid outright default, he says. Treasury can do that because it has far more data about who holds U.S. Treasury bonds and what they're owed. It's also easier because interest payments on bonds make up a relatively small amount of the overall budget.

But without a debt-ceiling raise, Treasury's ability to decide who is next in line to get paid is very limited, he says.

Take Medicare, for instance. Treasury doesn't have the capability to select which hospital system or which doctor gets paid. Those smaller choices about who gets paid first would fall to each agency and the particulars of their bill-pay systems.

And Smetters says it's unlikely most of those agencies have setups that make it easy to pick and choose, either.

"It's not going to be elegant or efficient," he says. "I mean, it's still going to be costly to be going through that manual approach."

Experts say it's not even clear if the government has the legal authority to selectively pay its bills, and doing so will almost certainly raise complaints about fairness.

On the other hand, Smetters says, the alternative is also ugly. Treasury could just keep processing payments. But then when the money runs out, there's no certainty the Federal Reserve, effectively Treasury's bank, would give it overdraft protection.

"So the big question there will become, does the Federal Reserve essentially bounce the checks," he says.